Demographic shift 'will cut UK growth'

Office for Budget Responsibility predicts curbs on immigration and costs of an ageing society will slow economy's growth rate

A carer with residents in an old people's home in East Twickenham. An ageing population and fewer immigrants will hamper growth, says the OBR. Photograph: Frank Baron for the Guardian
Frank Baron/Guardian

The long-term consequences of an effective ban on immigration and an ageing society will begin to catch up with the UK economy in 2014, causing a slowdown in growth.

This was the message from the Office for Budget Responsibility, which argued that changing demographics will have a profound effect on the UK economy's ability to grow.

Since net immigration peaked in 2007 at 233,000, it has fallen sharply and is expected to bottom out at 50,000 within the next couple of years. The OBR, which uses figures from the Office for National Statistics for its analysis, argues that a weak pound and a slowing economy will discourage migrants. With little prospect of a job and a devalued currency, the lure of coming to the UK and sending money home to family members is much diminished.

The report also suggests that the swelling ranks of retired baby-boomers will eat into growth and increase the budget deficit. While many women will stay in the labour market as the age for qualifying for the state pension increases to 65, the overall effect of an ageing society "points to a decline in labour market activity of around 0.15% a year," it said.

Aside from the additional costs of providing a state pension and occupational pensions to public servants, which adds to the burden on the public finances, an increase in over 65s to nearly 13 million will deny the labour market much-needed workers.

"We estimate that trend output will grow at just over 2.25% over the next three years, slowing to just over 2% from 2014 as demographic changes reduce the growth of the potential labour supply. Taken together with the judgement that the output gap was around -4% at the end of 2009, the projected level of trend output at the start of 2015 is around 3.75% below that implied by the assumption used for the March budget economic forecast," the report said.